Published February 3, 2009

Oil market takes baby steps forward

Some of the gloom is going away but things are still in a flux, say observers

By RONNIE LIM

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(SINGAPORE) The oil market here is stirring to life again, going by recent January activity. But stability is still a long way off as it suffered sharp plunges in market volume in the final quarter of last year.

'Some like Russia's Lukoil and others are starting to hire more traders here, especially as traders' salaries have become more affordable.' - An oil broker

Demand for gasoline from Indonesia and Australia picked up last month, one refining source said, with the rise in refinery wholesale prices reflected in two upward petrol pump price revisions here (totalling 9-11 cents a litre) in January - after six months of pump price cuts.

Trading of paper swaps or oil futures also rose by about 10 per cent last month against last year's monthly average, one oil broker estimated, as trading houses 'opened up new positions for the year'.

Furthermore, there has been no news of any more trading houses calling it a day here, he added, referring to the recent exodus of firms including the 'Wall Street refiners', or investment banks that traded oil, due to the credit crisis.

'Some like Russia's Lukoil and others are in fact starting to hire more traders here, especially as traders' salaries have become more affordable.'

'It's a good start, but it's too early to make a call that the oil market here is starting to stabilise,' the broker stressed, adding that bank credit is still tight.

Another refinery source agreed.

'While demand for gasoline from Singapore may have picked up last month, this was due to some plant shutdowns elsewhere. Diesel demand, on the other hand, was down, and this led to diesel pump prices here being cut. Overall, demand for oil products is still down.'

Refining margins here literally fell off the cliff in the second half of last year due to weak oil product demand as economies slipped into recession.

Listed Singapore Petroleum Company - the only one to report margins - said that average margins fell from US$10 in the first half of 2008 to US$1 a barrel in the second half. That meant that SPC's margins in fact turned a negative US$2 a barrel in the fourth quarter, after margins of US$7, US$13 and US$4 a barrel respectively in the earlier three quarters.

It's essentially wait-and-hope by the refiners here, including Shell and ExxonMobil, to see if oil product demand will pick up later this year, especially given the global economic downturn.

There have for instance been some encouraging signs of recovery in China, with Premier Wen Jiabao recently saying that there was a 20 per cent rise in domestic consumption there since the start of the Chinese New Year.

Asked if the Chinese had resumed buying oil products from Singapore, one oil trader said yesterday: 'They are just back at work today after their Lunar New Year break, so we don't know yet.'

'However, some financial institutions have come back to the paper swaps market here, and there has also been some activity in arbitrage trading of middle distillates like jet fuel and gas oil,' he added.

The former should hopefully help stir up some activity in the oil trading hub here, which in the last quarter of 2008 saw volumes plunging by an estimated 40 per cent.